The Small Business Administration has made recent changes to its lending programs that benefit both lenders and their smallest business borrowers. Those changes were part of the consolidated $2.3 trillion federal appropriations package signed into law Dec. 27, which also allocated $284 billion for the SBA’s Paycheck Protection Program (PPP).
“There are increased guarantee percentages for the bank,” said Mike McGinley, executive vice president – small business lending at Live Oak Bank.
He cited the provision that temporarily (through Sept. 30, 2021) enhances the terms of the 7(a) loan program by increasing the SBA’s loan guarantee to lenders to 90% and offering reduced or no fees for the borrower and the lender.
“Also, the guaranteed percentage for express loans of up to $350,000 increased from 50% to 75%,” McGinley added. “These can be term loans or lines of credit.”
The extra cushion of protection is designed to encourage participation in SBA lending by more financial institutions and to make it less risky for them to do so, McGinley said.
Another lender incentive comes in the form of reduced or waived fees, he continued.
“There is an upfront fee banks pay; it’s like an origination fee and is passed along to the borrower,” Mc- Ginley said. “That has been removed completely through September. Then there’s an ongoing annual fee of 55 basis points (0.55% of the loan balance) that is paid by the bank to the SBA. This fee is not passed along to the borrower. That fee has been removed on any loan originated through the end of September 2021.”
For borrowers, the December legislation provides a government subsidy of three months’ worth of principal and interest payments up to $9,000 per month for new loans. If the monthly P&I payment is more than $9,000, the borrower would pay only the amount above that threshold, McGinley said. For borrowers getting a second round of subsidy through the new legislation, that grace period is only two months.
For borrowers in especially hardhit industries, those terms are slightly more generous. McGinley pointed out that three of the 10 verticals he manages at Live Oak – franchise restaurants, educational services and fitness centers – are among what the bank calls its “COVID 6”: those industries at greatest risk because of the pandemic-related economic downturn. The bank’s other COVID 6 verticals are hotels, wine and craft beverages and franchise restaurants.
“Increased guarantees, fee reductions and subsidy payments: these are huge for the COVID 6,” McGinley said. “And these changes, from a borrower’s perspective, make [a 7(a) loan] more affordable for them. Subsidy payments give them a head start and drive people to the program. If they would have gone for a conventional loan six to nine months ago, now [the 7(a)] is more attractive. That focuses more attention on the SBA loans, and it’s good for us.”
McGinley said Live Oak Bank has seen an increase in its 7(a) applications, an increase that began even before the recent changes were announced. And things could get hotter if terms improve even more.
“There’s more stimulus coming as part of Biden’s [economic stimulus] bill,” he said. “We don’t know how it will affect small businesses, but it could increase the appropriation.”
The extension of subsidies for Self-Help Credit Union’s 7(a) borrowers is helpful, said Tracy Ward, who heads up SBA lending for the Durham-based credit union. She explained that the majority of their borrowers are very small businesses, including minority-owned businesses. And she’s seen an uptick in applications from them for SBA loans.
“The higher guarantee for lenders helps the borrower as well,” she added, explaining that the SBA’s temporary 90% guarantee can encourage a lender to take a chance on an applicant with a less-than-sterling credit history.
Since Self-Help is also a Community Development Financial Institution, Ward and others at the credit union are applauding a borrower- friendly change to the 504 lending program and waiting for SBA guidance on program details. The 504 program lends to businesses for capital improvements.
“Normally, if a 504 borrower refinances, it cannot take any equity out of the building, but the SBA is changing that rule,” she said. “A business that refinances its 504 now through December of this year can pull some equity out to reinvest in its business operations and help it survive.”
Refinancing is done through a bank or credit union, either the borrower’s original 504 lender or another lender, Ward explained, adding this is a good time to refinance, with interest rates on 25-year fixed-rate loans below 3%.
Many small and minority-owned businesses in the Wilmington market may not be aware of changes in the SBA 7(a) program that may make them more attractive to a lender, said Chase Faircloth, manager of Self- Help’s Wilmington branch.
“We are trying to get the word out more so we can help more businesses grow,” he said. “We do have resources available as well as loan counselors and internal partners we can reach out to and make things as simple as we can for small businesses.”